Why IBM Is Set for Long-Term Growth

International Business Machines (IBM) disappointed the Street with its fiscal third-quarter results as its revenue trailed analysts’ consensus. It is an indication that the company is still in the transition phase and its efforts in the fields of cloud computing, data analytics, mobile computing, and security are yet to yield substantial fruit. On the back of these headwinds, a number of analysts have cut IBM’s performance rating and also reduced its stock price target.

As per Yahoo Finance, “At least nine brokerages lowered their price target on IBM's stock after the company posted a bigger-than-expected drop in third-quarter revenue and cut its full-year profit forecast.” There is more to this story, but before going any further, let’s have a brief look at its numbers for the third quarter.

A look at the results and beyond

IBM’s revenue for the quarter fell 14% from a year ago period to $19.3 billion, while earnings adjusted for special items declined to $3.34 a share compared to an EPS of $3.68 in the same period last year.

Analysts on the other hand were expecting an EPS of $3.30 on revenue of $22.1 billion.

The numbers may be disappointing, but the company is making steady progress toward its cloud computing transition. In the light of its continuous development, management anticipates its revenue to grow to the tune of $40 billion by 2018.

Gearing up for growth

In order to achieve growth, IBM is bringing in more cloud, mobility and security to infrastructure services both to new clients and to help existing clients move to the future. Moreover, it has repositioned the portfolio of its high end servers and delivered innovation as these systems run the most contemporary workloads. As a result, it had strong growth in its Z Systems and continued success in POWER.

Going forward, IBM’s approach is to integrate acquired businesses with its own organic capabilities and leverage partnerships and a broader ecosystem to build new high value platforms. In this direction, IBM recently completed the acquisition of Merge Healthcare, which is a leading provider of medical image handling and processing, interoperability and clinical systems and the deal is valued at $1 billion.

Merge marks its third health care acquisition since the company launched its Watson Health unit in April and IBM intends to combine the capabilities of this new deal with its health analytics unit. As per Reuters:

“IBM plans to combine data and images from Merge Healthcare's medical imaging management platform with Watson's cloud-based healthcare computing system. The deal will help physicians and researchers collate and analyze data such as patient's medical and family history, data on others with similar symptoms and clinical research, trials and outcomes. “

In a nutshell it can be said that Merge will further push its cloud opportunities forward.

A look at other positives

In addition, IBM is creating similar platforms for other industries and areas such as internet-of-things. For instance, the company is working with a major global airline on how to apply cognitive thinking to understand all of the variables impacting fuel demands of any given flight. Although it is a longer term play, but its investment in creating new platforms such as these will yield considerable results in the days to come.

In addition, IBM recently penned a partnership with three sports technology companies, namely Triax TechnologiesTM, Spare5, and 113 Industries to develop cognitive applications powered by Watson. The spotlight of this deal is that it will help athletes to train better and amplify the game-day experience for fans. This is yet another decisive step, which could significantly boost its business going forward, since sports generate $700 billion revenue on a global scale.

Conclusion

All in all, IBM seems to be making the right moves that could yield good results. Its financial ratios also indicate the same as it has a forward P/E of 9.57 compared to a trailing P/E of 12.74, indicating that its earnings will improve in the future. So, beyond the disappointing results, IBM is a good investment.